My advice has been consistent over the years: get your portfolio allocation right and let us worry about the timing. It’s fair to say it’s a piece of advice widely ignored.
I come across a lot of people who have already decided they want to invest with Forager, but want to get the timing right.
If the past 12 months is anything to go by, more than a few get it wrong. We have historically seen counter-cyclical flows; investors have contributed more when performance was bad and taken money off the table when performance has been good.
From July to December last year, though, we saw strong inflows on the back of last year’s Forager International Fund (FISF) outperformance. Since January, when the one-year performance number for FISF started looking relatively bad, inflows have dried up and there have been a handful of larger redemptions.
Bad client experience
It’s a relatively small amount of dollars and it is not the revenue that worries me. The Forager business has made huge strides over the past few years and I’m more confident than ever we can achieve our aspirations. I just hate it when clients have a bad experience.
And I do get it. It is easy to sit here and say investors should be patient and invest for the long term. But the first year is the one with the most uncertainty. It’s no different to us buying a stock. You never know a company until you own it and I normally get a pretty good idea about whether our thesis is right within the first 12 months of ownership. I ask a lot more questions of myself and the company in that first year than I do in the fifth. It is natural that a new investor should do the same with their fund manager.
So I’m going to provide a few tips on getting your first year expectations right. To be clear, I don’t have any better idea about near term outperformance than anyone else. Had markets fallen over the past year rather than rocketing upwards, our cash-laden portfolios would have outperformed rather than underperformed. But there are a few markers that help you assess the current level of opportunity in the portfolio. Here are a few little tests.
The number of ideas working out
The first assessment to make is what has been happening in the recent history of the Fund. The fact that the FISF fund dramatically outperformed in the year to 30 June 17 tells you a lot. In fact, as this chart in the annual performance report showed, there was not one stock that made a meaningful negative contribution.
That should tell you something about any concentrated portfolio. It tells you a lot more when that portfolio is run by a value manager. We buy things that are unloved and trading at deep discounts to their intrinsic value. We hold them until the business shows its worth and that worth is reflected in the share price. And then we sell. When you see them all working out at once, it’s a fairly reliable sign that there are less remaining opportunities to make money than usual.
Are they being replaced with new ideas?
Next take a quick look at the top five holdings, read the latest quarterly and form a view about how many new ideas are turning up in the portfolio. Maturing ideas are fine if they are being replaced with new bargains. Here is the table from last year’s June quarterly report:
It doesn’t look particularly prospective. The top five holdings were large cap or up substantially over the previous 12 months. There could be plenty going on beneath those top five, of course, but the level of cash tells you that probably wasn’t the case. And that is the next marker to look to.
Cash holdings are the best marker there is
Restricted to one marker alone, I would choose cash levels. It tells you most of what you need to know about the opportunity set in front of your fund manager. When there are lots of bargains, we won’t be holding much cash. When we aren’t finding much to buy, cash levels will rise. At 30 June last year, cash levels were north of 30%, suggesting we weren’t finding much to replace those maturing ideas with.
The cumulative impact of those three factors was bluntly summarised in last year’s annual performance report:
“Past performance is no guarantee of future results, goes the standard disclaimer. One thing we can guarantee is that we’ll rarely, if ever, have a year as devoid of loss-making investments as 2016/17. That you can bank on.”
You don’t need to wait for us to tell you, though. You can look at the top holdings, new additions and most recent cash levels at any time.
Do it now and you will see that the portfolio is looking more prospective. While no one is on the Corn Flakes diet just yet, the cash weighting has fallen to 15%. There are a number of new ideas in the portfolio. We’ve been vocal about the bargains on offer in the UK. And we’ve been harping on about opportunities in oil for the past few years. With oil prices hitting multi-year highs and increasing talk of an improving market for oil services companies, you could expect the portfolio to be benefitting.
Great times ahead?
None of this necessarily means great times are ahead of us. If fact, we would welcome more meaningful market falls. It’s just looking a lot better than it was nine months ago.
Personally, I just get my money invested and leave it there. I stand by the view that very few people add value trying to get the timing right. There are solutions to buyers remorse, like dollar cost averaging. If you are going to try it, though, hopefully these few pointers help.
19 thoughts on “Timing a Plunge With Managed Funds”
Thanks Steve and Forager Team.
We have been with you from close to the beginning and are very impressed by your insights, diligence and returns with distributions / re-investments.
We have a personal portfolio, but you always best us.
Keep up the great work.
I must agree with Craig.
My wife and I have invested for our family since not long after Forager started. Like Craig we have our own investment portfolio and you guys sort us out all the time. Keep up the good work and thank you
As always Steve, measured and considered with underlying values of passion and authenticity with demonstrated presence to the unit holders.
As founding Forager members of Aust and International, planning is for decades to come with second generation unit holders on a regular saving program, and millenniums to follow in time.
The price paid will pale into insignificance over time of 10-50 years. In fact, with stellar years of outstanding performance will always sustain a portfolio of zero returns for a year or two or three.
In for a penny in for a pound… go you good thing, Steve.
Excellent transparent article. Thanks Steve
The richest man i know once said to me you only start making money when you stop worrying about it.Perhaps that saying may help some of your investors to start investing properly
Timely article. I entered the fund as a long tern investor and remain so. Some years will be better than others but I take comfort in the fact that you guys have a lot of your own personal money in the fund also. Keep searching for those “hidden gems” and the returns will follow. cheers
I endorse prior comments and as an original investor with the FISF I’m happy to be in for the ‘longhaul’.
Forager is to be commended for giving investors clear warning of what to expect and whether the product is appropriate. Clients have to take some responsibility for their experience to, especially if they didn’t understand the product or timeframe.
Good communication Steve.
Is there any intention to create a USD master feeder structure and any idea on timing?
This is a problem that all fund managers experience. People put a huge weighting towards recent performance (recency bias) rather than long term performance through the cycle.
I recall Kerr Neilson saying that in their research, they found that although the Platinum International Fund averaged 13% since 1995, many of their investors earned nowhere near that! This was because of the same issues you’re experiencing – investors trying to time the market, but doing it badly. Inflows coming in on the back of good performance and a rising or toppy market, and outflows happening just when the market starts looking cheap!
I doubt there is a fund out there more than 5 years old that has an investor base that has on average earned more than what the fund returned due to their capacity to time their entry and exits.
You are right about cash as a good indicator of how much opportunities are out there though. If the market is really cheap, there would be little reason to hold much cash.
Cash is a useful marker provided you’ve passed the first test and selected an above average fund manager. I certainly believe that’s the case here with Forager (and personally hold both FOR and FISF), but speaking more generally we know the majority of fund managers underperform their benchmark and the majority of market timing strategies also tend to fail, as per this article. Therefore cash is a good indicator of how many “perceived” opportunities are out there, but whether the fund manager perceives correctly or not, that’s an assumption to be tested.
I also agree a lot of fund managers experience this, the Peter Lynch example is oft cited, but the problem is mainly for the investors who self sabotage a portion of the return available to them. It does affect the manager too if liquidity is poor and shares need to be sold in a hurry at less than fair value to meet redemptions, but that shouldn’t be a significant problem for FISF and no longer for FOR either since it was converted to a LIT
You can’t fault Steve or the fund’s efforts at transparency and that is to be commended.
I am a relatively recent investor in the fund and I’m keenly observing the funds operations. Value investing without doubt yields results over the long term, which is why a lot of us are here. The impression I get however is that Forager is on the more aggressive side of the fence in its assessment of opportunities and portfolio allocation than other value managers (and there is nothing inherently wrong with that). I personally don’t think a cash allocation of 30% is particularly conservative, certainly with the abundant risks and overvaluation present in the world financial system. In any case I have taken this into account with the amount of money placed with the fund and will keenly watch how it performs over the next few years. I don’t think the downside risks to the world economy can or should be understated…the past 10 years have been a truly exceptional period as far as stock market returns are concerned…
Excellent article, Steve.
I’m in Forager because you’re very good at what you do and I like to sleep at night.
Roger Federer doesn’t win every match he plays. But I would rather back him all the time than try to guess when he will and when he won’t; and with that strategy I would definitely come out a winner long term.
Keep up the good work, both of you.
I once read that the magic of compound interest only starts to work its magic after about seven years.
In my case, I invested in the international fund in February 2013, reinvested half my distributions, and let my investment ride, through thick and thin.
We still have not reached that seven year period, when the magic starts to work properly. So, I continue to hold, reinvesting half my distributions and wait patiently. Steve and his crew will do the rest.
I too am a long term investor in FISF and a big fan ‘as above’.
The experience has not been without it’s frustration at times. In particular I have been surprised at the Fund’s preparedness to ride some bad bets into the ground, with corresponding impact on portfolio performance. 50% down on Technicolor thus far and no action! I don’t understand. Do you have a stop loss policy? When do you use it?
How much was lost on Countrywide? Just a couple of examples. As good as the FY2017 result was, I recall your reflections on how it could have been better with fewer mistakes made. What’s changed since then? I’m not questioning the amount of rigour applied during the investment process, but rather the contingency plan when things go wrong. And they do for every investor. It’s not easy. I get it, but hope is not a strategy.
Not my intention to upset anyone, but the frustrations that have been bravely acknowledged of late need to be better addressed.
Hi Ron, thanks for the comments and no need to worry – it takes a lot to upset us.
A couple of points:
1. We don’t use stop losses. I think they are nonsensical, especially for value investors. Most of our successful investments have gone down before they went up, and we have added substantial value over the years adding to our holdings at the point of maximum capitulation. Service Stream, Jumbo, Lotto24 … it’s a long list.
2. As for Technicolor, we have done a lot of work and made a very conscious, active decision to maintain our investment – I can assure you it isn’t passively hanging on without a plan. If it goes wrong from here you can blame me personally. And we have sold a lot of stocks where we think the business decline warrants it. Sabre, Coach, Foxtons and Countrywide itself for example. If you think Technicolor is worth less than the current share price, please send me your analysis, but selling because it is causing us emotional anguish is no more a strategy than hope.
3. You might be thinking of the Aussie fund when talking about 2017? The odd thing about the FISF in 2017 is that there weren’t any significant missteps. Personally I can handle a few more losses in the International Fund, as long as we have the corresponding big wins.
Ron, if you have not already done so, may I suggest you read a copy of Daniel Kahnenan’s book “thinking fast and slow.”
It will help you understand your psychological biases, and improve your investment processes. I read it in 2017 and found it helped me cope with some of the same gut feelings, you feel.
Steve & Forager team
I’ve been with you since the beginning. I also have a personal portfolio. I general terms FISF beats the personal US shares and most of the personal portfolio, with occasional divergences in performance.
So why am I with you? You can put the effort into the foreign analysis that I can’t. You have a measured, sensible, no BS approach. You are frank and honest about your wins and losses. You learn from your mistakes.
I’ve had money in managed funds before, without trying to time anything, figuring that 7-10 years should be long enough for the fund to show its worth. The returns from all my prior managed funds have been extremely disappointing. With Forager, I check the valuations every 1 to 4 weeks. I have 5 minutes of disappointment when the value drops, and 5 minutes of joy when the value rises. I don’t let those 5 minutes of short term pain or joy influence my general views that:
1. We need to be in for a long haul, and
2. The views and humility of the manager are a bigger driver of my desire to leave or remain; and
3. Attempting timing is foolish, but the slowly built emotional reaction to the manager is everything.
I know that emotion should not play a part in investing, but point #3 is critically important to me when using a fund manager. Reasoning is simple: we trust you with our money. If you baffle us with bull, or don’t meet your promises over a reasonable period (which for me is 5+ years), then I move my view from trust to grumpiness, and from grumpiness to unhappiness. And unhappiness is when its time to say “manager, you have lost my trust, it’s time to go”.
Part of retaining trust is being honest. Frankness about what you do, why you do it, celebrate your wins, publish your losses and learn from them, and you will gain and maintain trust. Hide things, or waffle, and you lose trust.
Trust is a pretty simple thing, but hard to win and easy to lose. I think you are doing well and the long term performance bears that out.
Not everyone has the same approach to trust, or time, or frankness, or BS. Perhaps those are the clients you don’t want. If they come and go in a flighty manner – don’t worry. Celebrate that they have gone and that you have clients who share your values.